How do state and local severance taxes work?

Specific State and Local Taxes

Thirty-five states levy severance taxes, which are taxes on the extraction of natural resources (including oil and natural gas). The revenue from these taxes is extremely volatile because it rises and falls with the price and production of natural resources.

How much revenue do state and local governments raise from SEVERANCE taxes?

State and local governments collected $17 billion from severance taxes in 2013. Nearly all of that ($16 billion) came from state taxes; only 11 states allow local severance taxes. This revenue only accounted for 1 percent of national state and local general revenue, but severance taxes provide a substantial amount of revenue in a few resource-rich states, such as Alaska, North Dakota, and Wyoming (figure 1).

Alaska relied on severance tax revenue more than any other state in 2013, with severance taxes accounting for 27 percent of combined state and local own-source general revenue. Severance taxes were also a substantial percentage of combined state and local revenue in North Dakota (24 percent) and Wyoming (10 percent). In no other state were severance taxes more than 5 percent of general revenue, but they accounted for more than 1 percent in Louisiana, Montana, Nevada, New Mexico, Oklahoma, Texas, and West Virginia. Fifteen states and the District of Columbia do not levy severance taxes.

Since these data on severance revenue were reported in 2013, the price and production of oil and other natural resources have sharply declined, as has state severance tax revenue. Alaska’s state severance tax revenue, in the most extreme example, fell from $1.3 billion in 2014 to less than $200 million in 2015. The volatility of severance taxes poses a challenge to states that use them as an important revenue source, requiring such states to have flexible budgeting arrangements, other readily exploitable revenue sources, or significant rainy-day funds to accommodate unforeseen changes in severance revenue flows.